New York Markets After Hours

Australia stands pat on rates, dollar jumps

SarahTurner

SYDNEY (MarketWatch) — Australia’s central bank kept its policy interest rate unchanged on Tuesday, citing an uptick in prices and a steadier global economy, with the decision sending the Australian dollar sharply higher.

The Reserve Bank of Australia maintained the cash rate at 3.25% after trimming the benchmark at its previous meeting.

The RBA rate-setting committee said Tuesday that “with prices data slightly higher than expected and recent information on the world economy slightly more positive, the board judged that the stance of monetary policy was appropriate for the time being.”

Commonwealth Bank economist Michael Blythe saw “a better tone to the economic data, but a high-side third-quarter [consumer price index] seems to have been the main impediment to a cut.”

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The Australian dollar
AUDUSD, -0.03%
jumped to $1.0428 after the rate call, up from $1.0367 just before the decision.

Stocks held their gains, with the S&P/ASX 200 index
XJO, +0.78%
up 0.2% at 4,484.80.

Going into Tuesday’s decision, interest-rate markets had been broadly split 50-50 on whether the RBA would ease at this month’s meeting, given that recent data painted a mixed picture of the Australian economy and that the RBA had already cut rates sharply this year.

The Reserve Bank has taken 100 basis points off its cash rate since the start of the year and 150 basis points since November of last year, when it started its easing cycle.

The bank cut rates in October, June and May of this year, citing a softer outlook for world economic growth, trouble in Europe, sticky borrowing rates and relatively tame inflation.

The decision Tuesday came even after Australia’s jobless rose to its highest level for more than two years in September, hitting 5.4%, according to the latest monthly employment numbers.

The weak labor report initially had economists thinking that another rate cut in November to support the economy was a fair probability, with the Australian dollar still at relatively high levels and concerns emerging about the U.S. election and upcoming “fiscal cliff” of automatic budget cuts and tax hikes if no action is taken.

But consumer price data out late October muddied the waters, with the quarterly seasonally adjusted CPI up 1.2% quarter-on-quarter, outpacing an expected increase of 1.1%, and reminding economists of the Australian central bank’s inflation-fighting credentials.

Also mitigating chances for a rate cut, China’s economy showed signs of bottoming in October, with third-quarter gross domestic product data meeting expectations and retail sales and industrial production data exceeding economists’ forecasts. China is a major buyer of Australian commodities and other goods.

Data out this week, meanwhile, showed that Australian retail sales rose 0.5% in September, up from 0.3% in August and exceeding a consensus forecast for a 0.3% increase, providing some signs of a recovery in retail spending.

Some economists are concerned that if Australia’s resource boom wanes substantially, then the other parts of the economy that have been battered by relatively high interest rates in recent years won’t be able to pick up the slack quickly enough to support growth at current levels.

Blythe at Commonwealth Bank said that “the door to further rate cuts is still firmly ajar, with the need to find alternative sources of growth once the resources/construction boom peaks in 2013 an emerging theme.”

But he said that after Tuesday’s decision, rate cuts in 2013 were a more uncertain proposition.

“The contractionary stance of fiscal policy means that monetary policy has to do more of the heavy lifting. So the risks still lie with lower rates beyond today. But that policy skew needs a benign inflation backdrop to work properly,” he said.

After the rate decision, short-term interest-rate markets were pricing in a 63% chance of a quarter-point rate cut in December, according to Credit Suisse rate strategists, but also scaled back the size of expected interest-rate cuts further out.

The markets are now penciling in 56 basis points of cuts over the next 12 months, compared to Monday’s pricing for rates to come down by 67 basis points over the next year.

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